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Units predicted to fall by 10 to 15% + How to identify a lemon property

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If you are a regular listener, you may be familiar with my views about an Australian company called Open Agent. Well, Mark Armstrong from Rate My Agent – a similar site – has heard what I have had to say and will join me shortly to talk about why he says his company is different and they can’t all be lumped in the same basket… more on that soon.

Strata laws are changing and they will have an impact on the millions of people living in strata properties in NSW. The new strata laws take effect from the end of this month – November 2016 so if you own a Strata property in New South Wales you will need to understand the changes and we give you an overview today. Also these laws are likely to spill over into other Aussie states.

Stephen Walters – former chief economist for JPMorgan and now working for the Australian Institute of Company Directors says prices of apartments will fall 10 per cent to 15 per cent over the next one to two years, squeezing buy-to-let investors who have borrowed to negative gear and are heavily relying on capital gains. It is going to get ‘ugly’ he says and we ask for more information on where, what, when and how.

This week we feature a chat with social researcher Mark McCrindle and ask what it is about his job – analyzing and commenting on our behaviours and market trends – that has influenced how he has viewed property investing.

As with any investment, real estate has its good, bad and average performing assets and if you’re not careful, you could easily end up with a property investment lemon. The best way to uncover an underperforming asset, before it eats too far into your bottom line, is to annually review your portfolio and ask yourself some hard questions. Michael Yardney details those in this show.

You will find us at iTunes under podcasts as Real Estate Talk. Listen there for free, leave a review which helps us grow and tells us what you like and how we can improve the show. Don’t forget to subscribe at the site as well –even if you do get the show through iTunes – so that we can tell you about the bonus offers we make to subscribers. Your questions are welcome through the site as well.

 

Transcripts:

“Not all third part sites are the same as Open Agent” – Mark Armstrong

Kevin:  You know the old saying, “Oils ain’t oils”? They’re not all the same. We’ve been guilty in this show of branding all of the third-party sites the same. I’ve been a particular critic of sites like Open Agent and even Local Agent Finder, for the main reason that they report to being something that they’re not or that they say that they will do something for the consumer that they don’t.

In the process of putting this spray out and carrying a lot of material, we also mentioned Rate My Agent. In my opening, I said oils ain’t oils. It’s been pointed out to me that Rate My Agent is not the same as the others. The CEO for that site, Mark Armstrong, joins me.

Good day, Mark.

Mark:  Good day, Kevin.

Kevin:  Oils ain’t oils, and you pointed out to me that your site is different. How is it different?

Mark:  The major difference is that Rate My Agent is not a referral website. Our business model is to never ask agents to share their commission with us and essentially, sell leads to agents. There are two fundamental reasons why we will never ask agents to share their commission with us.

The first one is that we don’t want to be in competition with real estate agents. We’re here to complement the industry and help promote good agent and good agency practice. We’re not here to compete with agents. If we asked agents to share their commission with us, we would simply be in a competition with them to get to the vendor first, and that’s not our job.

The second reason – probably more important for us – is independence is our greatest asset. If we were to ask an agent to share their commission with us, we would cease to become independent in the eyes of a consumer. We’re not here to compete with agents, and we’re 100% independent in the process.

Kevin:  This is the problem that I have – and I’ll say it again – with Open Agent. They purport that they’re going to put the consumer in touch with the best agent in the area, when in fact, it’s the agent who has agreed to pay them a 20% commission. I know that they’ll vehemently deny that, but it is, in fact, the case. And not all agents want to be a part of that particular site.

Let’s set the record straight here. If you don’t, therefore, ask agents for a percentage of their commission – you’re not a referral site – how do you monetize the site?

Mark:  Our website uses what we call a freemium model. It’s completely free to claim your profile, request reviews, update your sale results, make your profile look as accurate as possible, and to set up a data feed through your listing feed provider. That’s completely free.

If an agent chooses to – they have no obligation to do so, but if they choose to – they can subscribe to higher levels of features, which include a premium profile, which allows them to brand their profile and have their reviews cross-promoted across the site.

They can use our social media manager. We’ve had around about 60,000 social media posts of agents’ reviews, listings, and sale results go across social media this year alone. They can use our review widgets, which allows them to take their reviews from Rate My Agent and automatically flow them through to their agency website.

Lastly, they can use our listing reports. Our listing reports allow them to take their reviews out of Rate My Agent, present them in either a printed format or a digital format, e-mail or SMS to a prospective vendor, just to show the prospective vendor the experience that they’ve put in that market. Not just showing them their sale results – which are important – but the greatest tool that a real estate agent has to win more business is customer feedback.

All of our products are about collecting customer feedback and allowing agents to use that customer feedback as a marketing tool to win more business.

Kevin:  Mark, I can understand how your site populates to the agent when they get a listing because you’re obviously scraping all of the portals and you’re getting a good handle on what listings are actually coming on the market. It seems to me that the majority of the gripes that I’m hearing from agents are at the other end of the equation. That is the number of properties they sell is not accurate. What’s your reaction to that?

Mark:  Most of our data actually comes directly fed through the agencies, through PortPlus, Box+Dice, or MyDesktop, and all of those listing portals or the backend portals. The vast majority of our data comes through that source, which means we get the listings as soon as they’re listed. As soon as they’re sold and they’re reported, it updates our system.

Agents and agencies always have the ability to set up a data feed. It’s absolutely free to do that. Then they can ensure that their data is 100% accurate. It also allows them to send through off-market transactions or development stock, so they can have a really accurate profile.

For agents who don’t have a data feed, you’re right, we collect as much information from the public domain as possible. But agents can then, once again, claim their profile for free, come into the back end of our system, and if they have sold a property that we don’t have the result for, it takes them literally 30 seconds to update the system, report the result.

Once they’ve reported the result, our system prompts them and says, “Would you like to request a review?” If they’d like to request a review, they type in the vendor or the buyer’s name and e-mail address, a brief message, and push “Send.” It’s as simple as that.

Kevin:  Of course, all of these sites are only as good as the information they provide to the consumer and how accurate it is. Can you give me an idea as to how many agents do actually engage and feed that sort of information back into your site?

Mark:  There’s well over 20,000 – I think it must be close to 21,000 agents now – who have engaged in our platform. Those agents sell around about 75% to 80% of all real estate across the country. When we look at the number of properties that they sell, we have the vast majority of the market at around, as I said, 75% to 80%.

The interesting point is that most of the agents or a large group of the agents now also request their reviews through Rate My Agent. We currently get a review posted on Rate My Agent every three to four minutes.

There are around about 170,000 reviews that have been posted, and currently, that represents a review for one in four properties sold across the country each month. So 25% of all properties that are sold each month, Rate My Agent gets a review for them.

It’s really important that everyone understands that these reviews are what we call verified reviews, because the only way to get a review on Rate My Agent is for the agent to come into our system, confirm the property has been sold, and then request the review through our platform, which means that every review that’s posted is linked to the transaction.

That clearly shows the property that the review relates to. It clearly shows whether it’s a review from the vendor or the buyer. And then that review is instantly indexed by Google. It’s shareable through social media. It can be shared on their website. They can use it in any way they like.

Kevin:  Mark, thanks very much for joining us today. I appreciate you coming to me and, through your people, pointing out that we had made an error. It’s good to be able to clear it up.

Mark Armstrong has been my guest. He’s the CEO of the website Rate My Agent. Jump in, have a look at it, and join those agents who are making sure that their data is up to date and accurate for the consumer.

Mark, thanks very much for your time.

Mark:  Thanks, Kevin.

 

Strata laws change – Garth Brown

Kevin:  The next interview is a New South Wales-only story, but it’s a major story because as we’ve seen sometimes, what happens in one state is going to then maybe run around to all the other states, as well.

Just by way of introduction, I’m going to talk to Garth Brown from Brown & Brown Conveyancers about the major strata law changes that are taking effect in New South Wales from the end of November.

Garth, thank you very much for your time.

Garth:  Thanks, Kevin.

Kevin:  These changes, as I said, take effect on the 30th of November. Just give us a bit of an overview about what some of the key changes are in this legislation.

Garth:  Probably eight of the most significant ones are to do with overcrowding, parking, pets, smoking, renovations, proxy harvesting, and collective sales. There’s one on defects bonds, which is really interesting and this is coming into effect on the 1st of July, 2017.

Kevin:  What is the defects bond? Tell us about that? How is that going to impact landlords?

Garth:  With a lot of apartment buildings going up in Sydney over the last 20 years, there are a lot of people moving into apartments. What they’ve found, and what I’ve found with my conveyancing work, is that these buildings are quickly whacked up, put together haphazardly – not all of the, but some of them – developers get out of there and after settlement, say, within the first three years after settlement, all of these defects start to appear in buildings.

Lo and behold, all of these developers have either left or they just push it back and make it so hard to try and rectify.

Kevin:  I’ve heard a lot of those stories, particularly out of New South Wales, for some reason. What’s going to happen? How does the defects bond work?

Garth:  It’s interesting for everyone to know about this. Actually, the developer will have to place a bond of 2% of the value of the building to cover any potential defects after completion.

Kevin:  It’s likely that 2% is probably going to be tacked onto the purchase price, I would have thought. Developers will add that to the figure?

Garth:  Probably will spread it out across the apartment building, yes.

Kevin:  It’s logical that that would happen, but I guess the upside, therefore, is for owners. If they know that 2% bond is there, that’s going to help them with any defects, as you said, that may emerge.

What are some of the major defects? Is it to do with water getting in and leaking?

Garth:  Water penetration is a big one. You have cracks in walls. You have a settlement: as the building starts to settle, you get cracks in walls, pipes start to break. Or maybe the floor or the ceiling just haven’t been done, haven’t been constructed property. Tiling hasn’t been tiled property, or the glue hasn’t been in the right consistency.

Kevin:  This is coming in on the 1st of July next year, which means that any new buildings after that period, once they’ve been registered, this bond will have to be in place?

Garth:  Definitely. Yes.

Kevin:  There’s no retrospectivity on this, at all?

Garth:  No, not according to legislation here.

Kevin:  Earlier in our chat, you said that the changes that are coming into effect, there are eight major ones: overcrowding, parking, the defects bond – which you just told us about – pets, smoking, collective sales, renovations, and proxy harvesting.

One that interests me that I think will also interest a lot of people too is about pets. What’s happening in that area, Garth?

Garth:  Just at the moment, you have to write for body corporate approval to have a pet in the apartment and it’s not to be unnecessarily withheld – the consent. With this new regime, they’re trying to make it easier for pet approval.

A lot of people have pets and a lot of people are moving into apartments, but what you find is that there are some really restrictive owners who don’t want pets and will make it very hard to get pet approval.

Kevin:  I’ve actually seen some sales fall over on the fact that they can’t have a pet, so it does mean a lot to a lot of people.

Smoking: does that mean that restrictions on smoking will be tightened a bit?

Garth:  Yes, there will be restrictions that smoking is to really take place outside of the apartment building.

Kevin:  All right. They’re the laws that are going to come in place at the end of November, and the one about the defects bond clicks in from the 1st of July, 2017, and you’re going to see a lot more about that.

Just before I let you go, Garth, I notice on your website, too, that you have a number of e-books that are available. Once again, New South Wales, if you’re looking at any sort of conveyancing, these e-books are absolutely free on your website?

Garth:  Yes. We have an e-book on buying a property, what to expect, and also on selling a property, what to expect and what documents are required, all designed to try to give you a heads up, relieve stress and the fear of the unknown.

Kevin:  Mate, it’s a very stressful time, whether you’re buying for investment or you’re buying for a home. The website to go to is Conveyancers.net.au and you’ll find the e-books there, written on the homepage. Garth Brown has been my guest.

Garth, thank you for your time.

Garth:  Thanks, Kevin. I appreciate it.

 

Identfying a lemon property – Michael Yardney

Kevin:  No one wants to make a dud investment. When it comes to property, how do you know if you’re buying a lemon? Michael Yardney has been looking into this. Michael, of course, is from Metropole Property Strategists.

Good day, Michael.

Michael:  Hello, Kevin.

Kevin:  Michael, how do we know if we bought a lemon? What are the signs?

Michael:  I guess the first thing you should do is review your property portfolio every year and ask yourself some hard questions. The questions I’ll be asking myself are “Is this property performing like I expect it to?” I’ll be asking “Is it outperforming the market?” because at the moment, rising tide lifts all ships in some of the big capital cities.

I’ll be asking myself “If this property were on the market today, would I buy it again?” I’d be looking at it and saying, “Is there anything I could do to improve my property so that it can generate more return, more income?” The last question I’d ask myself is “Is this the sort of property that’s going to outperform the market? Is it likely to do well in the long term, in the next decade or so?

In my mind, the answers to these questions will help you decide whether it’s the sort of property that you should be keeping in your portfolio or not, Kevin.

Kevin:  One of the important questions I’d like to ask you is what makes a property underperform?

Michael:  There could be a couple of things. The first thing is you could buy at the wrong time of the cycle. This is maybe when values aren’t going to go up much or that they’re near their peak and they’ll be languishing for a while. It could be timing.

It could be the price. If you pay too much, you’re likely to have to wait a couple of years for the real value to catch up. It could be the location. Some locations are just going to underperform. In my mind, 80% of the performance of your property is made up by the location. And it could be the property itself – in other words, just poor property selection.

What I’d be suggesting is you look at those, because if you bought the right property but at the wrong time or paid too much, Kevin, generally you’re going to find real estate is forgiving and time will work on your behalf, and eventually, it will be okay.

But if you bought the wrong property or in the wrong location, that’s when you have to look at it more seriously. You maybe have to bit the bullet.

Kevin:  I want to talk to you about biting the bullet and how you get rid of it. Before I do that, can I ask you, is one of the reasons why a lot of people buy a lemon because they don’t have a plan?

Michael:  That’s a good point, because they don’t even know what to judge it on. You have to go right back at the beginning and have a strategy and understand, is it capital growth that you’re looking for? Is it cash flow? What sort of capital growth are you expecting?

Realistically, in this market, it won’t be as strong as a couple of years ago, so you’re right, Kevin, they have to know what they’re looking for and have some parameters to judge against.

Kevin:  Selling the lemon: one thing is about recognizing it and then getting rid of it. I read an interesting blog – off-topic for a moment, but I suppose it is the topic – where a well-known commentator was suggesting that if you’ve been holding on to a lemon in one of those mining towns that we know so much about, Michael, maybe you should hang on because there’s a better time ahead. Is there a good time to sell one of these?

Michael:  I guess by the time most people recognize, they’ve already suffered a lot of opportunity cost. People say to me, “It doesn’t cost much. I’m actually getting some rental coming in.” The cost is the opportunity cost – what else could you have done with the money?

Selling also comes at a cost of paying sometimes some capital gains tax – often, there isn’t any – or paying stamp duty on their next property. Yes, Kevin, you often have to step one or two steps backward to move forward.

But hoping that those mining towns are going to come around again, in my mind, it will not happen in your lifetime or mine. The fact is there are property cycles, but in some parts of the world and in some parts of Australia, the cycle between one peak and the other is so long that it’s just not worth waiting for, Kevin.

Kevin:  The bottom line, Michael?

Michael:  If your financial capacity is that you can only afford to hold – I don’t know – three or four properties, you should aim to own the best properties, the best assets you can. I know there are times when the market is flat and you may not get the price you want, but waiting to take action until the market picks up is only going to increase the gap between your under-performing property and those with stronger properties that are going to perform much better.

Essentially, the sooner you identify and offload your underperforming property, the better. Then you can just get on with it, because it’s a financial drain, but often, it’s also an emotional drain on you, isn’t it?

Kevin:  It is, indeed. Wash your hands. That’s your advice?

Michael:  Yes, wash your hands with lemon.

Kevin:  Good talking to you, Michael. Thanks for your time.

Michael:  My pleasure, Kevin.

 

“What research has taught me about property investing” – Mark McCrindle

Kevin:  I’m delighted to say that our featured guest this week in the show is Mark McCrindle, who we’ve spoken to in the past. Mark, of course, is a social researcher, a commentator, and principal of McCrindle.

Mark, welcome to the show, and thank you very much for giving us your valuable time today.

Mark:  No worries at all, Kevin. I’m glad to be with you.

Kevin:  Mark, we normally talk about you analyzing the market, looking at what people are doing, and so on and so forth. Would it be fair to say that that gives you a bit of an insight as to how the market is going to perform? Does that help you at all with your investment strategy?

Mark:  Yes, definitely. I think being in an area where, as we do, we look at demographic change, we run a lot of research projects, we get across a lot of data sets just looking at some of the trends, that does help inform life. You keep an eye on the changes, and obviously, you apply a little bit of that to one’s own business decisions and investment, as well.

I think everyone should be across and looking at abroad trends and changes, but we do it professionally and so hopefully try to apply some of the learnings that we made.

Kevin:  I guess one of the failings that a lot of investors find is that they over-analyze the market. They almost go into paralysis through analysis, I guess. Are you guilty of that at all?

Mark:  I guess we’re blessed in that our analysis, our research approach, is very broad by its nature. It’s looking at demographics, and it’s looking at some global trends. We’ll run surveys, and then on the ground, we run a lot of focus groups. We’re asking people different decisions or different insights to different questions. We will survey various industries. That then gives that helicopter view, which I think is the approach that everyone should bring to their investment.

I think you’re right; the problem with some analysis is that we get so focused in on our particular thing that we miss the big picture – the focus on the woods and missing the trees approach. We all need to keep it broad. I guess our work takes us across broad areas, so that’s pretty useful.

Kevin:  I guess a lot of people, if they over-analyze something, they end up looking for reasons not to do it as opposed to reasons to do it.

Mark:  That’s right. Sometimes we can over-analyze the market numbers, particularly. We can over-analyze financial data, and I think that’s where the problem lies because these things, any investment, humans, we’re not rational; we’re emotional. It’s not based on individual numbers or charts, but it’s societies, it’s behaviors, it’s attitudes.

While observing the charts and the financial trends, keep an eye on the market, of course, but also step back and have a look at what else is happening. Even if something on paper is going well, step back and say, “Okay, but what are the timeless human drivers in this? Is this really going to work long-term?”

You wouldn’t want to put all of your savings into Pokémon Go even though at the time, it was the number one app and taking off. You step back and say, “We understand human nature. Things come and things go. Apps arrive and they fade again.”

I think that’s how we all need to approach things: look at the multitude of factors, not just one particular trend line and think that that will tell us the future.

Kevin:  Mark, are you an active property investor?

Mark:  Yes, I am. Early on, I realized that for me and probably my field of demographics but also just in life, it was probably the one thing I had an interest in. I had a little bit of time to look at some of the data and kept a bit of an eye on the trend, certainly more than equities and shares.

For me, property is where the numbers and the people meet. Because we spend a lot of time researching people, then that, for me, has been something that I’ve utilized. It’s probably the Aussie dream, that people who invest in property. More than anything else, that’s been where we put a little bit of money over time.

Kevin:  Mark, where was your first property deal, and what did you have to do to get into the market?

Mark:  As young people today face – I was, I think, 24 and was just about to be married – we rented for a little while and then got hold of a little unit at Harris Park in Parramatta in Sydney’s west. Basically, the west of Sydney back then – and to some extent, now – was where the most affordable housing was. The cheaper part of Parramatta was a little part of it called Harris Park. We found a tiny little unit, and it was all that we could afford.

But I just knew, and I watched my own dad in that way, own something real and get something you can pay down, and start with what you can afford. If it’s something you’re prepared to live in, it’s something that will be sellable in the future. All of those basic bits of wisdom held us in good stead.

It was back when you could afford these things, or at least, it seems like it was quite affordable in today’s money. It was $121,000, I remember, that we paid. That was a lot of money and a big mortgage, but we got that thing and paid it down. It allowed us to leverage, once we sold that, to the next unit. That stepping-stone approach that still exists so much in Australia was our start, as well.

Kevin:  Yes, interesting to hear that you sold because I guess in those days, the banks were not all that encouraging even taking into account double incomes and people building property portfolios, so you really had to use that as a springboard to go to the next one.

Mark:  Exactly right. It was about paying down the mortgage a little bit, getting a little bit more equity in the place – capital growth. If you buy well and in an area that is a little under-priced and can hold for a reasonable time – and I think we were there for five years, something like that – that just lifted the price enough to then step up to something that was going to be a bit more useful for us, particularly as at that point in our lives, our first and indeed our second child had come along.

I’m someone who believes in being financially conservative, in not carrying too much debt, in making timely decisions rather than rushing into it, building things over time. Rather than thinking we’re going to be financially independent in a short period, it’s about taking the long view – and that was our approach – and not getting in over our heads.

As is often said, you want to be able to sleep at night and relax without too much debt. We took that stepped approach, moved up through a few places, and that helped us eventually move into a home.

Kevin:  Are you a trader of property or more an accumulator?

Mark:  To start out, definitely a trader because we couldn’t afford the first place let alone holding and moving to others. Again, particularly that it’s not just my decision but with my wife. You have to work with, I think, the capacities and confidence that each party has.

While I was maybe willing to take a little bit of financial risk, particularly just starting a young family, my wife not so much, so it was, “Let’s keep our mortgage affordable; let’s not overly leverage ourselves.” We just took the step-by-step approach. It may not be the quickest way to grow, but it’s certainly a safe way and it’s a way that creates not too much stress.

Yes, it was buying the first place, selling and upgrading to another unit. I held that for a few years, sold and upgraded to a home. Held that for a little while, sold, and got a block of land – stepped it up like that.

Kevin:  What’s the best property deal you’ve ever done?

Mark:  Probably buying some land. We bought some vacant acres just on the outskirts of Sydney. They were not presented very well. They were really scrubby acres. The person selling hadn’t slashed the property. I think the location was not as well presented; there was a bit of rubbish, builder’s waste, and stuff like that in the front.

Also, if it’s vacant acres, there’s not as much demand for that. People want an old house on acres they can live in while they build their dream place. But we saw the potential of it and found that we could get in without being outbid by many others.

That worked out well for us, and even though we weren’t ready nor did we have the capacity to build at that point, we just knew that it was an unbeatable deal. We saw the potential in the land, so we bought that and held that until we were in a position to then actually work out our plans, move through that whole process, and build a home there.

It was just looking at a few of the factors that lined up to be able to take advantage of a really good deal even if it was a bit earlier than ideally we would have planned.

Kevin:  What about a deal that maybe didn’t go so well for you that probably we can learn from? What lessons did you learn from that?

Mark:  A big one for me was buying some shares when I really didn’t know anything about the share market. I had no personal interest in the share market and was not about to get interested in it. It was actually the T2 float. We all remember Telstra 1 and how well that did. A bunch of us, late to the game, “Oh, there’s going to be a second Telstra share float, so let’s get in if we missed the first one.”

That’s well known in the annals of Australian history that everyone who got into the T2 float saw the value of those shares drop. It might now, after many years, have come close to being what was paid, but in terms of growth and value, it really didn’t work out very well.

I learned a big lesson. Putting not a massive amount into something like that, it’s not going to cost you your life savings or cause major dramas, but it taught me enough. When we didn’t have heaps of surplus, it taught me a sharp lesson to remind me that I have no business investing in things I don’t understand or that is not a personal passion and that I can’t add any value to. I might as well let others who have more of a specific strength or insight into the market… How can I compete against the smart money in that sector?

That brought me back to what I know more and what I deal with in terms of people and property.

Kevin:  I suppose another lesson, too, is not following the herd mentality. Just because the first one was successful doesn’t mean the second one is going to be necessarily.

Mark:  Exactly. There’s the old mantra I should have taken advice from: when everyone is buying, then sell; when everyone is selling, buy. Being counterintuitive often does work out well.

Kevin:  What’s the most important thing that you’ve learned about successful property investing?

Mark:  Great question. For me, it’s probably not buying your ideal place but buying the best valued place. It’s not necessarily always chasing the perfect situation for you, but chasing what has the most potential. The two are quite different.

Every investment is a series of compromises, but if there are going o be compromises, you might as well compromise and downgrade a little bit in terms of what might be your ideal luxury or your ideal location if you feel that the opportunity, the investment and the growth is there in that place.

I guess that’s what has worked for me, having a second look at something that maybe because of its presentation or appeal is not red hot, because if it’s not red hot but you see value there, then that’s tomorrow’s winner. That’s where the growth is going to be. If it’s already well presented, chances are it’s at its peak already and you might have to wait a while for the growth.

I think that was key, as well as just holding to those timeless financial mantras of not getting in too deep, of holding for a reasonable period, and also of making sure you can take something and service it and not feel the stress over it, because you have a fair while as life goes on, to accumulate and set yourself up for retirement. You don’t have to rush into it; you might as well enjoy the journey.

Kevin:  Would you invest in property outside of Australia?

Mark:  Probably back to my share market experience…

Kevin:  Yes, I thought you might come there.

Mark:  I would try to apply the lesson learned. If I don’t have any specific knowledge and if I’m not going to put the time into understanding the market, then I have no right to be in it, because if it comes unstuck, there’s no point in complaining. You have to take responsibility for your investment, and if you can’t stand behind it, then why put your money into it?

For me, certainly, people understand it well and do it well and there are great professionals who will put the advice out there, but if I’m taking the reins of the investment myself, it’s certainly not something that I have the knowledge in, nor indeed, the time to really give it the quality analysis and investigation that it requires.

Kevin:  Mark, great talking to you. Thank you very much for your time.

Mark:  No worries at all, Kevin.

 

Unit prices to drop 15% to 20% – Stephen Walters

Kevin:  Reports flying in from all around Australia about what’s happening with unit prices. I’m going to pull into the conversation now the Chief Economist of The Australian Institute of Company Directors and also former Chief Economist with JP Morgan. Stephen Walters joins me.

Stephen, thanks for your time.

Stephen:  Hi there, Kevin.

Kevin:  I want to talk to you about your prediction of a 10% to 15% fall in apartment prices over the next couple of years. Is that right across Australia, or are there some patches worse than others?

Stephen:  No, certainly some parts of Australia will be worse than others. I’ve arrived at that conclusion just by looking at the supply/demand imbalances in some markets. Interestingly, the two real hotspots are inner-city Melbourne and inner-city Brisbane. There are also elements of other supply in inner-city Sydney, but it’s much less acute.

In that sense, I’m looking at the sheer amount of new apartments that are being constructed in both Brisbane and Melbourne inner city relative to the existing supply. That’s clearly identified the areas that when you look at demand for the apartments relative to the amount of new construction that’s going on, they really stand out as having some pretty serious oversupply over the next couple of years.

Kevin:  Is it a slowdown because of the number of buyers, or is it a slowdown because returns aren’t quite attractive enough for investors?

Stephen:  It’s a bit of everything. There has certainly been a bit of waning in demand, not much; it’s more of supply response at the moment. If you just look at the number of cranes and the amount of construction that’s going on, there’s a very big supply response going on. But don’t forget at the same time, there’s a bit more caution from the banks in terms of providing credit into that segment of the market.

I wouldn’t say the banks have really squeezed that part of the market, but it is a little bit more difficult as an investor – and particularly within that group, a foreign investor – to get credit to actually borrow into that apartment market.

It’s on both the supply side where there’s a massive increase, but also on the demand side. When you get in that combination of those two – we’ve seen this in the past – it typically is not that difficult to do the arithmetic on that. When you get a big increase in supply and a small decrease in demand, you’re going to have some problems.

Kevin:  Is there any evidence that this could be put down to how tough some of the restrictions are on foreign buyers? Is that slowing the market a bit?

Michael:  It is. The problem there is that it’s very hard to get statistics on foreign buyers. We do get a lot of information from the Foreign Investment Review Board, and foreign buyers are supposed to be registering with the FIRB, but often, there are ways to get around that.

We know that there has been a lot of buying that ostensibly is foreign buying but it comes through domestic sources, whether it’s relatives or friends or other means of actually buying domestically. It is a little bit difficult, but certainly, anecdotally, we’ve heard the banks talk about probably a less or a diminished willingness to lend into that sector.

Also, there has been a bit of concern about foreign buying about not just our residential real estate but other assets. I think there’s a general perception that there has been a bit of a slowing in that segment.

But on the flip side, anecdotally, you get plenty of evidence that there’s still plenty of demand by foreigners to buy assets in Australia. There are various reasons for that, whether it’s wanting to take their capital out of offshore markets for various reasons or simply that Australian property has been such a lucrative investment for a long time.

I think that, often, buyers are a bit slow to see what the underlying dynamics are in a market that clearly is looking at some pretty serious oversupply.

Kevin:  Are we seeing many defaulters at this time, Stephen?

Stephen:  Not yet. I think that’s still some way off. In the context here, remember that interest rates are at all-time lows and the unemployment rates is at a three-year low. The dynamics at the moment are quite good, so that’s not the place to look in terms of anticipating trouble.

I think you can see in the statistics on rents, in particular, that rents are actually already falling. This is what economists look for. When you’re looking for some pressure points in a market, you look for price signals, and the earliest price signal you get of oversupply in housing is that vacancy rates go up, and therefore, rents go down. We’re already seeing both of for those.

Defaults will come later, but I’m not anticipating a big rise in defaults. I think it’s interesting that the Reserve Bank in their Financial Stability Review that was released ten days ago or so came to a similar conclusion, that there’s likely to be an oversupply in some parts of the apartment market, but not widespread systemic distress with people unable to pay their mortgages or a collapse in the market.

But certainly, you can get price falls. We’ve seen it in the past where you get certain parts of the market, particularly high-density city apartment market, where prices do fall, but to get widespread defaults, I think you need something pretty serious to happen with unemployment going up and interest rates going up. And it’s very unlikely you’d see both of those at the same time.

Kevin:  I’m talking to Stephen Walters, who is the Chief Economist with Australian Institute of Company Directors, also former Chief Economist with JP Morgan.

I’m just wondering if there are any areas that are immune to some of these falling prices. You mentioned inner-city Brisbane and inner-city Melbourne in the opening. What about some of the other areas – beachside areas, as an example?

Stephen:  This is the problem with residential investment. It’s very hard to generalize across an entire market. We’re only looking at the apartment segment of the market, let alone certain parts of that. I think there’s always differentiated products, whether it’s coastal or, for example, in Sydney, if it’s near the harbor, or in other parts of the country, whether it’s on the river or on the coast.

There are always advantages for some parts of that residential property market, but remember there’s another market out there that’s not the high-density dwelling segment at all; it’s the detached housing segment. I don’t actually see a particular problem there. I think in the detached market segment, where there’s a much bigger land component of the price, I don’t see an oversupply in that market at all. In fact, you could argue there’s an undersupply there.

We have to be careful about extending what I think will be some problems in those inner-city markets in those particular cities to the broader housing market because I think it’s unlikely we’re going to see sustained price falls in the house market generally.

But I think when you’re looking at inner city away from the coast, away from the harbor, for example, in other parts of Australia, there’s likely to be some pretty serious price weakness. But you’ll quite likely see prices holding up in other parts of the country within the same city.

Kevin:  You mentioned that falling rents are a bit of an indicator that that particular part of the market could be in strife. What are the other indicators? Are there any others that would indicate that things are on a downward trend?

Stephen:  Vacancy rates are going up, so that’s the clear one that typically leads to rents. We’ve seen, not in a serious way, but vacancy rates have been ticking up in those two cities I mentioned, Brisbane and Melbourne, in particular, and including in Sydney.

I think that’s the place to watch in the near, term because rents tend to be a little bit slow to react. People tend to have their lease locked in for perhaps 6 or 12 months, or possibly even longer, so you don’t see their rents adjust down until the actual tenancy ends. So vacancy rates are often a good one to look at, and we’ve seen those going up already.

But I think also, some of the official published data you get from the Bureau of Statistics on dwelling completions, for example. It’s not hard to match up the amount of supply that’s coming onto the market relative to the amount of dwellings that are already there.

We’re getting some pretty serious numbers. Between 5% and 8% of dwellings that are already completed are coming onto the market in addition to what is already there. We haven’t seen those sorts of levels for at least two decades in terms of new supply coming on.

Certainly vacancy rates are the place to watch followed by the rents. But I think ultimately, you’re likely to see prices come off as well because given that, certainly, investors are very active in that high-density inner-city apartment market, if you’re getting lower returns each month because your rental income is falling, you’re likely to get lower prices, as well. That’s a cascading effect, so look at the vacancy rates, watch the rents, and ultimately, watch the prices.

Kevin:  Great advice. Stephen, thank you very much for your time.

Stephen:  My pleasure, Kevin.

2 Comments

  1. Graham Ko Reply

    From what I’m reading buying the first property is the hardest. After the first property is all about duplication. Holding onto prime properties is investing. Property prices will go up and stabilise over cycles. All the talks about fear property bubble and bust are based on emotive and not data.

    From a layman point of view if the property market goes bust the whole of economy goes down with it. An example of this is the GFC in America. The issue there is the unethical practices of bank lending home loans out to people knowing they can’t afford the repayments led to the GFC. The banks tried to manipulate the property cycles and not allowing the cycle to move naturally,. They gave birth to the GFC. If they were manipulating the stock market the same way… I’ll let the readers finish the story from here.

    The strengths of the Australian economy is based on the wealth of the property market.

    1. Kevin Turner Reply

      Wise words Graham.

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